NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the long-term Issuer Default Rating (IDR) of CenterPoint Energy, Inc. (CNP) at 'BBB'. Fitch has also affirmed the long-term IDR of CNP's subsidiaries CenterPoint Energy Houston Electric, LLC (CEHE) and CenterPoint Energy Resources Corp. (CERC) at 'BBB+' and 'BBB' respectively. The Rating Outlook for all three companies is Stable. Approximately $6 billion of outstanding long-term debt is affected. A list of all rated debt is provided at the end of this press release.
Key Rating Drivers:
CenterPoint Energy, Inc. (CNP)
Regulated Operations Drive Performance
CNP's ratings and Outlook reflect the stability of earnings and cash flow provided by its regulated utility operations. In 2013, EBITDA from CNP's regulated business segments represented nearly 70% of consolidated EBITDA. Fitch considers CEHE's transmission and distribution (T&D) operations in Texas as low risk due to the absence of provider of last resort (POLR) obligations, no commodity risks and an improving regulatory jurisdiction in Texas that enables CEHE to recover its expenses and investments with minimal time lag. CERC's gas distribution business benefit from geographic diversity and various supportive recovery mechanisms. Additionally, Texas's economy has consistently outperformed the national average and fosters steady customer growth for both CEHE and CERC's gas distribution segment.
Midstream Investments Add Risk
Fitch believes that the formation of midstream JV (Enable) and the subsequent IPO will not meaningfully alter the overall business strategy and operating risks as CNP and CERC will continue to exercise significant operational and financial control indirectly. In addition, Fitch believes that CNP and CERC will likely support Enable under time of stress due to its strategic importance. Though Fitch acknowledges that the midstream assets contributed by CNP and its partner OGE are complementary and will enhance operational scale, the earnings are directly affected by volatile commodity prices and volumes as a result of fundamental supply and demand. Enable mitigates such volatility by entering into fee based contracts. For the year ended Dec. 31, 2013, approximately 76% of the gross margin was generated from fee-based contracts and approximately 50% of gross margin was attributable to firm contracts or contracts with minimum volume commitment.
Consistent Credit Metrics
Fitch expects CNP's credit metrics to remain in line with its rating category and other diversified utility holding companies with similar operating risks. Over the next three years, excluding effects of securitization bonds at CEHE and consolidating proportionately Enable's cash flows, earnings, and leverage, Fitch estimates that CNP will produce funds from operations (FFO) interest coverage, on average, of 4.8x and Debt-to-EBITDA of 3.5x. In the past three years, FFO interest coverage averaged 4.4x and Debt-to-EBITDA 3.4x.
Adequate Liquidity
Fitch believes that CNP and its subsidiaries have good liquidity. CNP, CERC and CEHE have $1.2 billion, $600 million and $300 million revolver capacity respectively, all maturing on Sept. 9, 2018. For the year ended Dec. 31, 2013, $1.194 billion, $482 million and $296 million was available at CNP, CERC and CEHE, respectively. The available credit capacity will be sufficient to cover the limited debt maturities and shortfall of operating cash needs in the next 12 to 18 months.
CenterPoint Energy Houston Electric, LLC (CEHE):
Low Risk T&D Business
CEHE's IDR and Stable Outlook reflect the low business risk of its regulated electric transmission and distribution operations in Texas. Fitch considers the regulatory environment in Texas reasonably supportive to CEHE's credit profile. CEHE has the ability to earn a return on its transmission and distribution investments with minimal regulatory lag. In addition, CEHE bears no commodity risk and does not maintain the provider of last resort requirement like T&Ds in other jurisdictions.
Solid Service Territory
CEHE's Texas service territory has historically delivered strong population and economic growth relative to national averages. The unemployment rate in Texas was 6% in December 2013, below the national average of 6.7%. At the peak of the financial crisis, its unemployment rate was 8.2% compared to the national average of 10%. Houston metropolitan area's unemployment rate was 5.5% in December 2013. Driven by the strong economic environment, CEHE has seen reasonably healthy customer growth of 2% per year.
Credit Metrics Well Positioned
Fitch expects CEHE's credit metrics to position well within its rating category in the next three years. Fitch forecasts CEHE's FFO interest coverage to average 4.4x and total debt-to-EBITDA to average 2.6x over the next three years.
CenterPoint Energy Resources Corp. (CERC)
Relatively Stable Earnings
CERC's IDR and Outlook incorporate Fitch's expectations that the company will continue to derive the majority of its earnings and cash flows from its natural gas distribution operations with added stability through fee-based earnings at Enable. CERC's cash flows from gas distribution benefit from diversified service territories and overall favorable recovery mechanisms in six states.
Midstream Investment Important but Volatile
Enable's performance will directly impact CERC's financial health as CERC's share of Enable's EBITDA represents approximately 50% of CERC's total EBITDA. CERC also continues to exercise significant operational and financial control over Enable indirectly. Fitch acknowledges that the formation of the JV and subsequently the IPO will enhance scale, create synergy and equity funding sources. However, earnings at Enable are directly impacted by volatile commodity prices and market fundamentals which are beyond CERC's control.
Midstream Guarantee
CERC provides a limited guarantee for Enable's three-year $1.05 billion bank term loan maturing in 2016. Such guarantee is subordinated to CERC's existing debt and is of collection not payment.
Rating Sensitivities:
CNP:
Positive
--If CERC or CEHE is upgraded.
Negative
--If CNP through CERC incurs substantial leverage to meet the capital calls of Enable;
--If CEHE, CERC or Enable is downgraded;
--If Debt to EBITDA exceeds 4x on a sustained basis and/or FFO Interest Coverage is less than 4x on a sustained basis.
CERC:
Positive
--CERC could be upgraded if Enable issues a sizeable amount of its economic interest to public shareholders, demonstrates a sound operational track record, and upstreams stable distributions.
Negative
--CERC's ratings will be negatively impacted if the regulatory construct governing the gas distribution subsidiaries becomes unfavorable;
--CERC incurs substantial leverage to meet the capital calls of Enable;
--Debt to EBITDA exceeds 4x on a sustained basis and/or FFO interest coverage is less than 4x on a sustained basis.
CEHE:
Positive
--Unlikely absent upgrade at CNP and CERC.
Negative
--The regulatory environment becomes contentious such that CEHE is unable to receive timely and reasonable recovery in rates;
--If Debt/EBITDA exceeds 3.7x and/or FFO interest coverage is less than 3.5x on a sustained basis.
Fitch affirms the following ratings with a Stable Outlook:
CenterPoint Energy, Inc.
--Long-term IDR at 'BBB';
--Senior unsecured notes and pollution control revenue bonds at 'BBB';
--Secured pollution control revenue bonds at 'A';
--Junior Subordinated Debenture (ZENS) at 'BB+';
--Short-term IDR/Commercial paper at 'F2'.
CenterPoint Energy Houston Electric, LLC
--Long-term IDR at 'BBB+';
--First mortgage bonds at 'A';
--Secured pollution control revenue bonds at 'A';
--General mortgage bonds at 'A';
--Unsecured Credit Facility at 'A-';
--Short-term IDR at 'F2'.
CenterPoint Energy Resources Corp.
--Long-term IDR at 'BBB';
--Long-term senior unsecured notes at 'BBB';
--Short-term IDR/Commercial paper at 'F2'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012);
--'Recovery Ratings and Notching Criteria for Utilities' (May 3, 2012);
--'Rating North American Utilities, Power, Gas and Water Companies' (May 16, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
Recovery Ratings and Notching Criteria for Utilities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722085
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=823494
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